Importance of Standard Costing in Pricing and Budgeting Overhead: Standard costs are predetermined costs for direct materials, direct labor, and factory overhead. They are established by using information accumulated from past experience and data secured from research studies. The established standard costs for materials, labor, and factory overhead form the foundation for the budget. Since the importance of standard costing is huge in the process of setting prices it is essential to set these standards at realistic levels.
The importance of standard costing is boundless. A standard states the cost under given conditions which are held constant in order to observe and measure fluctuations. The measurement of deviations from established standards or norms is accomplished with the aid of variance accounts. These deviation measurements are similar to budget comparisons in that they compare actual with predetermined data.
The deviation measurements and budget comparisons are also alike in that both relate to the idea of responsibility accounting. It should be noted, however, that standards with their variance analyses go beyond the mere comparative level.
Standard costs constitute a basic accounting tool which aids in the solution of managerial problems, so the management should realize the importance of standard costing. The accounting measurement of variances provides management with necessary information; and to be complete, standard costs’ service to management should include systematic, day-by-day reports relaying deviation information which requires the attention of management.